ALTO - NASDAQ

Good day and welcome to the Alto Ingredients Inc. Third Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Kirsten Chapman with Alliance Advisors Investor Relations. Please go ahead.

Thank you, Megan. And thank you all for joining us today for the Alto Ingredients third quarter 2024 results conference call. On the call today are President and CEO, Bryon McGregor, and CFO, Rob Olander. Alto Ingredients issued a press release after the market closed today, providing details of the company's financial results. The company has also prepared a presentation for today's call that is available on the company's website at altoingredients.com. A telephone replay of today's call will be available through November 13, the details of which are included in today's press release. A webcast replay will also be available at Alto Ingredients website. Please note that the information on this call speaks only as of today, November 6. You are advised that time-sensitive information may no longer be accurate at the time of replay. Please refer to the company's Safe Harbor on slide 2 of the presentation available online, which states that some of the comments in this presentation constitute forward-looking statements and considerations that involve risks and uncertainties. The actual future results of Alto Ingredients' could differ materially from those statements. Factors that could cause or contribute to such differences include, but are not limited to, events, risks and other factors previously and from time to time disclosed in Alto Ingredients' filings with the SEC. Except as required by applicable law, the company assumes no obligation to update any forward-looking statements. In management's prepared remarks, non-GAAP measures will be referenced. Management uses these non-GAAP measures to monitor the financial performance of operations and believes these measures will assist investors in assessing the company's performance for the periods reported. The company defines adjusted EBITDA as unaudited consolidated net income or loss before interest expense, interest income, provision for income taxes, asset impairments, loss and extinguishment of debt, unrealized derivative gains and losses, acquisition-related expense and depreciation and amortization. To support the company's review of any non-GAAP information a reconciling table was included in today's press release. On today's call, Bryon will provide a review of our strategic plan and activities and Rob will comment on our financial results. Then Bryon will wrap up and open the call for Q&A. It is now my pleasure to introduce Bryon McGregor. Please go ahead, sir.

Thank you, Kirsten. Thank you all for joining us today. In Q3 2024, our Pekin campus increased its production capabilities and uptime compared to the prior year quarter, improving its profitability despite fluctuation and fluctuating market conditions. As a result, Q3 2024 consolidated gross profit improved to $6 million and adjusted EBITDA was $12.2 million. Rob will discuss our financial results in greater detail in a moment. First, I'd like to comment on today's TSA announcement. We've taken a significant step forward in our commitment to sustainability by finalizing a definitive CO2 transportation and sequestration agreement with Vault. Under the terms of the agreement, Vault will handle the transportation, injection, and sequestration of CO2 from our Pekin campus into the Mount Simon sandstone formation in Illinois. This partnership marks a critical milestone on our journey towards a more sustainable and prosperous future. While we await EPA submission and approval, address financing and source equipment, this agreement brings us closer to achieving our goals of lowering our carbon footprint and monetizing the value of the biogenic CO2 we produce at our Pekin campus. Regarding our operations, in Q3, our Pekin campus wet mill increased productivity by its highest level since 2020, reflecting in part the results of our successful biennial repairs and maintenance outage in Q2. This translated into greater production of specialty alcohols, reaching 42% of total Pekin sales volume, 7 percentage points higher than the same period last year. We remain on track to sell 90 million gallons of specialty alcohols in 2024 and expect to match this volume in 2025. We continue to modernize our equipment and facilities to improve reliability, lower our operational costs, and reduce our carbon footprint. In addition to assigning the TSA, we are currently building a second alcohol loading dock at our Pekin campus. Our goal with this project is to improve river logistics by expediting the shipping costs, adding redundancy and expanding our capabilities to accommodate a wider array of barges. We expect synergistic effect and increased overall loading efficiencies. The planned cost of this second dock is less than $3 million and is scheduled for completion in 2025. And at Magic Valley, we completed upgrades to harvesting technology system to capture high protein and corn oil products and restart the facility to prove out the system and to benefit from positive crush margins at the time. In October, our facility consistently achieved average ethanol production rates at full capacity. Our protein content reached 50% or greater, and we've been able to expand our corn oil yields. We commend the yeoman efforts of the our operational team, along with the technical support provided by Soil Net. This restart has informed us of the technology system's capabilities as we consider deployment at our other dry mills in the future. I'll have more to say on Magic Valley in a few minutes. Turning to a market review, Q3 began with solid ethanol crush margins supported by strong exports. Domestic demand began to weaken with a decline in miles driven, attributable in part to weather related events. As ethanol production remained relatively high, it has outpaced demand resulting in higher ethanol inventory levels and lower ethanol prices. In Q3, carbon prices were approximately 80% lower in Oregon and Washington and 20% lower in California compared to the same period last year. While carbon prices remained low in October, we've begun to see some recovery. In Q4, we expect corn prices to remain low, reflecting a good harvest, resulting in a strong carryout into 2025, which is a good thing. However, with corn prices lower in the US compared to international prices, demand for US corn exports will likely increase, straining logistics and driving up transportation costs. Also, when corn prices are low, corn suppliers typically require prices to at least cover their costs, driving up corn bases. This is one reason why we expanded our corn storage capacity at Pekin and are considering increasing storage even further. While higher transportation costs impact all ethanol producers, they have a more substantial impact on our western operations. In short, higher transportation costs significantly increase the price for delivered corn at our two western plants compared to Midwest producers that have access to local corn supplies and cheaper basis. Although the improvements we've made at our Magic Valley facility have delivered economic benefits, as we mentioned in our press release on October 15th, the recent increases in regional corn basis and declining protein and corn oil market prices have resulted in overall margin compression outweighing the economic benefits of our plant improvements. To address these challenges, we continue to pursue opportunities to maximize the Western plant's strengths and advantages. We've engaged Guggenheim Securities to actively explore our alternatives to monetize or optimize these assets, including through potential partnerships. Further, we will continue to explore operational opportunities and assess market trends. Unless there are notable improvements in economics at our Magic Valley facility, we plan to idle the plant before the end of Q4 and believe that will have a positive impact on the company's financial results. Finally, while our Columbia facility is also experiencing margin compression, the combination of lower transportation costs, premiums earned on lower carbon ethanol, and revenues generated from our CO2 sales make Columbia more economically resilient than Magic Valley. Turning to our sustainability efforts, we completed our 2023 sustainability report and have increased our disclosure on topics such as environmental, health, safety, quality, and social metrics. Our core values of responsibility, integrity, and quality drive our mission to produce the highest quality, sustainable ingredients that make everyday products better. We proudly offer the 100% bio-based renewable products from our specialty alcohol and essential ingredients to renewable fuels and plant-based proteins. Our highly efficient dry-grind facilities are striving for carbon intensity scores below 50 by optimizing efficiency, upgrading energy infrastructure, and selecting sustainable feedstocks. Our dedication to sustainability and social responsibility extends to our customers, employees, investors, partners, suppliers, and consumers, and our focus on product quality and safety. We conducted material assessments with internal and external stakeholders and identified multiple long-term market opportunities to viably expand bio-based renewable offerings. The third party certification we earned include the areas of oversight on risk management, chemical storage, handling, transportation and disposal, multiple food safety initiatives, quality management, good manufacturing practices, and requirements for all active pharmaceutical ingredients and excipient products and supply chains for waste streams. Now I'll turn the call to Rob.

Thanks, Bryon. I'll review the financial results for the third quarter 2024 compared to the third quarter of 2023. We sold 96.8 million gallons, consistent with 97.1 million gallons sold during Q3 2023. However, due to lower market prices in Q3 2024, net sales were $252 million compared to $318 million in Q3 2023. Total gross profit was $6 million compared to $4.2 million in Q3 2023. I'll review the various contributing factors. We benefited significantly from a lower consolidated corn basis, which declined $0.63 per bushel compared to last year. This was partially offset by market crush margins declining $0.10 from a year ago to $0.41 per gallon. The Pekin campus contributed $6.2 million to gross profit, improving tenfold year-over-year, in part due to improvements resulting from our scheduled repairs and maintenance in Q2, as well as a positive shift in sales mix. Especially alcohol gallons sold increased by 4 million compared to the same period last year. However, this was partially offset by a 24% decrease in our average price for essential ingredients as compared to Q3 2023. Our Western facilities had a gross loss of $2.3 million compared to a gross profit of $1.5 million in Q3 of 2023. The majority of this $3.8 million year-over-year decline in gross profit was driven by downtime and greater costs associated with upgrading and restarting our Magic Valley facility. Additionally, the Columbia facility generated $1.6 million less in revenue due to an 80% drop in carbon prices. Also, our consolidated realized derivative gains were $3.6 million compared to $6.2 million for the same quarter in 2023. I will review our hedging in greater detail in a moment. This quarter, we recorded $830,000 gain on sale of certain idle assets related to our purchase of Aventine. Our consolidated net loss was $2.4 million compared to a net loss of $3.5 million in Q3 2023. Adjusted EBITDA was $12.2 million, including $3.6 million in realized gains on derivatives for Q3 2024. This compares to $13.6 million, including $6.2 million in realized gains on derivatives and a $2.8 million USDA grant related to the biofuel producer program in Q3 2023. As of September 30th, our cash balance was $34 million and our total loan borrowing availability was $92 million, including $27 million under our operating line of credit and $65 million subject to certain conditions under our term loan facility. We generated $18.6 million in cash flow from operations in Q3, bringing our year-to-date total to $6.3 million of cash provided by our operations. We invested $500,000 in CapEx after accounting for various energy rebates, bringing our year-to-date CapEx total to $9.8 million. During Q3, on a consolidated basis, we recorded $8.1 million in repairs and maintenance expense, in line with the prior year quarter, and we are on track with our 2024 estimate of $34 million. Turning back to derivatives, we are frequently asked about our hedging strategies and how they impact our financial results. While this is a complex area, I will provide a few highlights on how we use derivatives. We employ a variety of risk management strategies to mitigate the price volatility of different commodities throughout the year as a normal course of business. These strategies may include managing the spread between corn and ethanol prices, otherwise known as the crush margin. We may also take positions on corn and natural gas. Currently, our core strategy is to hedge the premium over fuel-grade ethanol of our specially alcohol contracts that have fixed sales prices of up to one year or longer. Through the use of derivatives, we are able to lock in premiums for the duration of the contract overproduction that otherwise would be sold as ethanol. For the positions that settle, we record the cumulative unrealized gains or losses on these positions since inception to realize. On the remaining unsettled positions, the change in market values at the end of each reporting period is reflected as unrealized. Unrealized activity is not an indication of what will be realized in future periods. The best way to determine the value or obligation to be realized in the future, measured as of a specific date, is to note the amounts on our balance sheet. The net derivative asset or liability reflects what Alto would realize if we liquidated all of our positions as of that specific period and date. With that, I'll turn the call back to Bryon.

Thanks, Rob. Executing on our vision, we deliver the highest quality ingredients to our customers every day. Our scheduled repairs and maintenance, as well as our CapEx initiatives, are delivering improved productivity. We've advanced our CCS initiative and furthered our strategy to reduce carbon emissions by entering into an agreement to facilitate the safe capture and storage of carbon emissions from our Pekin campus. We are positioned to manage changing market dynamics, and to capitalize on the unique opportunities presented by our facilities. Our team is committed to improving profitability on a sustainable, consistent basis, and we are optimistic about the future. Operator, we're ready to begin question and answer.

[Operator Instructions]. The first question comes from Eric Stine with Craig-Hallum Capital Group.

This is Luke Persons on for Eric Stine today. So we have a couple of questions here first. How should we be thinking about Magic Valley's targeted annual EBITDA uplift around $9 million that was originally outlined? Does that outlook still stand given what's been demonstrated so far?

Luke, the original expectations were based on a fundamental contribution. The challenge is that the market conditions have changed dramatically since when we originally built those forecasts, particularly around corn oil values, protein values, and they were based on a corn price that was significantly higher than what we're seeing today. So that's difficult to actually ascertain at the moment. As we said in our prepared remarks, we see significant benefit from this improvement, but given the material deterioration, particularly in the Western market, that any of the material benefits that we experience are currently more than offset by the deterioration and crush margin for those facilities.

Just a quick follow-up question here. Touching on the carbon capture side and the SAFE CCS Act, do you envision any change to the moratorium timeline for new permits given the recent ADM leaks?

It's a good question. We certainly haven't seen any outward response from the EPA. What I would say generally, though, is that even from the time that ADM originally completed – well, not only submitted and had the approval, but then completed the well work, there's been significant changes in the way that the work is done, the quality of the casings, the depth, the strength and the like. So I don't know that it would be particularly applicable to – whether it's ours or anyone else's going into the ground today. That said, time will tell.

[Operator Instructions]. The next question comes from Justin Dopierala with DOMO Capital Management, LLC.

It sounds like, as far as CoPromax, Magic Valley, it is operating as thought. In the implementation of that, you guys must have lost tens of millions of dollars. So, I guess my question is, have you considered seeking recourse against harvesting technologies in some way to be compensated for the losses that they were likely responsible for?

Justin, we clearly have explored and are exploring all options, both productive and probably less productive if we were to do it that way. And there is also opportunities. I guess what I would also say is that, in response to not only your comments, but the question that was posed earlier was, we don't expect this to be a permanent state. It certainly is a reflection of what's happening at the market, in the current market, but that's not permanent. And so, we would still expect to see significant benefit from this improvement. And we see opportunities to be able to do it elsewhere. So we take those all into account. We understand and probably experience it more than most the pain and the struggle that we've had over the last couple of years to try and bring this to the fore. That said, the fundamentals behind the technology and the fundamentals of doing it at Magic Valley are all still sound.

Based on your response, it does sound like you are actually potentially seeking recourse of what could potentially be tens of millions of dollars. Would that be fair to say?

I wouldn't clarify any more than what I've already mentioned.

Could you comment or probably a bit more color on the Guggenheim hire and what precisely they're looking at and what the thought process is there?

Yeah, it's considering all the options. As we said historically, we have evaluated from time to time and have engaged in this process multiple times with Guggenheim and with other investment banks to see and to make sure that we're maximizing and optimizing the return on investment for the company and for shareholders. So it would include any and all aspects of that, whether it's to bring in partners, whether it's to sell the asset, whether it's to keep the asset on and to make further improvements to those facilities. What's the best way to liberate the real material benefits of those locations. Yes, there are certain challenges that they face, as you can see at the moment, but they also can contribute significantly to the benefit of the company and the shareholders. And there's still a lot of untapped opportunities and qualities about those sites that are unique that you can't duplicate elsewhere. So we'll want to make sure that we evaluate all of that. And that's part of the story.

Absolutely. Each one of your sites clearly have much greater value than the stock is currently worth. Given that and given the lack of profitability in somewhat favorable or quite favorable operating environments, would this review also consider the sale of the entire company?

As we've always said that we owe it and our responsibilities are to shareholders and we calculate – or we include all of those options all the time.

I think you need to expedite the process.

This concludes our question-and-answer session. I would like to turn the conference back over to Bryon McGregor for any closing remarks.

Thanks, Megan. Thank you all for joining us today. We appreciate your ongoing feedback and support. Have a good day.